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M&A activities to focus more on consolidation and restructuring than on mergers and acquisitions in the coming year

The recent economic recession has forced multinationals to cut costs in order to offset disappointing revenues. This has led to a new trend in Mergers & Acquisitions (M&A): corporate simplification. PwC expects an increasing number of business reorganisations that lead to greater integration and simplification, and hence cost savings in the coming years.

Size does matter…

Since the start of the new millennium, the number of M&A in Europe has shown an upward trend, as has the average value of such deals. In 2007, the combined value of all mergers and acquisitions in Europe was some € 1,100 billion, compared with € 424 billion in 2003 . According to the same source, the total value of all deals worth more than € 500 million was no less than € 863.7 billion in 2007, compared with € 298.5 billion in 2003. Companies conduct M&A with the aim of increasing their market share or gaining access to new markets and activities.

“This can sometimes result in extremely complicated corporate structures with different entities and divisions in various countries, and mean that some of the benefits of the acquisition, in the form of synergies or cost savings, are not realised,” said Harmen Rosing, expert on tax aspects of M&A, PwC Czech Republic.

…as does manageability

Structural complexity of this kind is a cause of many unnecessary costs. These may include overlapping management structures, double staffing of back office positions, or high compliance costs. Moreover, a complex structure leads to a higher effective tax rate as the operating results of various companies in different countries cannot be consolidated. And if these companies make profits, higher tax expenses may be incurred when these profits are passed on through the organisation to shareholders.

“The deadline for implementing EU Tax Merger Directive and its latest amendment was January 2007. Now, in 2010, all 27 EU member states have implemented the directive into their national legislation and, together with the Legal Merger Directive, cross-border mergers can be implemented across the EU in a fully regulated manner,” said Nancy De Beule, Director at PwC Tax Consultants BCVBA, one of authors of ‘Tax Restructuring in the EU’, a handy guide which, in addition to going into more detail on aspects of European taxation in the event of mergers and acquisitions, also provides details of the relevant tax legislation in the 27 member states, published by PwC.

Growing trend towards simplification

Achieving cost savings is clearly one of the top priorities of management, and reducing the complexity of the corporate structure as a result of M&A plays an increasingly important part in this. In practice, businesses wind up dormant companies, reduce the number of active entities by means of mergers or integrate subsidiaries into the parent company, and convert separate legal entities into branches so that profits and losses can be consolidated.

Reducing the number of business entities means fewer compliance costs and less work for financial and back-office functions. Of course, some of the consequences for employees are not so pleasant. Reorganisations usually mean redundancies as double staffing is eliminated. Local decision-making is also undermined. In effect, people see the power to make decisions being taken away from local entities and transferred to the parent company.

“Consolidation and restructuring are clearly on the rise,” Jan Fischer, corporate taxation expert, PwC Czech Republic, explained. “According to Intralinks’ Global M&A Survey, around 62% of the M&A professionals expect to see a sharp rise in the number of business reorganisations in the coming year. But while simplifying the corporate structure may lead to one-off or structural savings, it also entails costs itself... Companies therefore need to conduct a thorough analysis and weigh up the costs and benefits before they go down this route.”